When starting a new business, there are many decisions to make. How will your company be structured? How will it be taxed? What about the employees and their benefits?
One consideration is whether or not you want a limited liability company. There are many reasons why people choose to start their business as an LLC, but there are also disadvantages that come with it.
Generally, South Dakota is a good state for limited liability companies.
This article will discuss how to start an LLC in South Dakota, including the types of businesses created as LLCs and the advantages and disadvantages of doing so.
Quick Summary:
- To start an LLC in South Dakota, follow the steps required by the state and submit all the necessary documents.
- The members of an LLC in South Dakota have the option on how the business entity is taxed.
- A South Dakota LLC benefits from limited liability, single taxation and flexible management.
Steps to Setting up an LLC in South Dakota
Before your South Dakota LLC can be legally recognized by the state, you need to perform a few necessary steps and file South Dakota LLC documents.
Whether you opt for a single-member LLC or a multiple member company, the following checklist will help you establish your LLC correctly and efficiently.
Step 1: Choose an LLC name
First, choose a name for your LLC by searching through the South Dakota Secretary of State website.
Use the following guidelines to ensure that your preferred company name is approved by the state:
- Your chosen name must be unique and cannot be used by any other business entity registered in the state.
- The name must be accompanied by the words "Limited Liability Company," or its abbreviations – “LLC” or “L.L.C”.
- Company designations such as “Corporation,” “Association” and “Incorporation” may not be used with the name of the LLC.
- Restricted words include Bank, Trust, Insurance, Credit Union or Cooperative.
- Words that can be associated with a government agency, such as Federal, Bureau or Treasury should not be included.
South Dakota Secretary of State allows LLCs to file the Name Reservation application, which costs $25. The reservation will be valid for the next 120 days from the date of filing it [1].
You have the option to rename an LLC in South Dakota if the nature of your business expands or changes.
Step 2: Hire a South Dakota Registered Agent
South Dakota business law requires that to start your LLC, you need to employ a registered agent. Designate a member of the limited liability company or employ registered agent services in South Dakota to represent the company.
The registered agent acts as a point of contact between the state and your company and is tasked to receive any legal notices or documents. To illustrate, the registered agent is notified if your LLC failed to file annual reports.
The registered agent keeps your LLC updated with any changes in business laws while keeping the company compliant with the state.
If you don't want to worry about maintaining an office in South Dakota or keeping up with changing regulations, hiring a registered agent service is the best option for you.
They will take care of all of that for you and make sure that everything is in order.
Having a registered agent service handle all of this for you will also save you time and headache while protecting your business from any legal consequences down the road due to lack of compliance.
The last thing that a startup LLC in South Dakota wants, or can afford, are fines or other penalties for not having an office space or designated registered agent in the state.
A reputable registered agent service will also act as your company's representative with any government agencies, instead of making you do all of that yourself.
Step 3: File South Dakota LLC Articles of Organization
South Dakota LLC Articles of Organization are filed with the South Dakota Secretary of State.
The South Dakota Articles must include:
- LLC name, address, and phone number;
- Purpose(s) for which formed;
- Names & addresses of each member
- The organizer of the LLC
- Name and address of the registered agent
- Management structure
The Articles of Organization are filed with the South Dakota Secretary of State through its online portal.
The filing fee for new LLCs is $150. Paper filings are $165.
After you file South Dakota Articles of Organization, the LLC is officially formed and will be registered in the state's database of businesses.
The South Dakota Secretary of State will issue an "LLC Certificate of Formation" and send it to the LLC via mail.
This document evidences that the LLC has been legally formed and is now a registered business entity.
Learn more about the total cost of an LLC in South Dakota.
Step 4: Draft Your LLC Operating Agreement
The state of South Dakota does not require an LLC to draft an operating agreement, but it is highly advisable since the internal document governs the company's internal workings.
The operating agreement is not filed with the South Dakota Secretary of State but should be kept on file by the LLC.
The operating agreement indicates the following provisions:
- How profits and losses will be allocated among LLC members
- How business assets will be distributed if a member leaves or passes away
- Voting procedures
- Decision-making
- Management
- How the LLC will handle future changes to its membership
If you have little to no experience in drafting operating agreements, it is best to consult with an attorney or registered agent who specializes in LLCs.
Step 5: Open a Business Bank Account
A business bank account is essential for an LLC. This account will help you keep track of your business finances and make it easy to pay your taxes.
When opening a bank account for your LLC, be sure to choose a bank that offers LLC-specific accounts.
This will ensure that you get all the features and benefits that come with having an LLC account.
LLC-specific accounts offer many perks that standard business bank accounts don't, such as the ability to accept a business credit card and loans.
It is extremely important to keep personal assets separated from business assets by having an LLC bank account designated for business entity use only. You should never use your personal bank account for business transactions.
This can lead to confusion and complications down the road, and eventually, it can break your "corporate veil."
When opening a business bank account, you will need to provide some basic information about your LLC, such as the name of your LLC and the state in which it is registered.
You will also need to provide your EIN (Employer Identification Number). Your LLC's business checking account will be opened with the EIN.
Make sure that you get a separate LLC debit card, which can only be used for business purposes and not to withdraw funds from your personal account or make everyday purchases.
Step 6: Obtain an EIN
Federal tax identification number or Federal employer identification number (EIN) is a number that the Internal Revenue Service issues to companies.
EINs are used for many purposes, including filing tax returns and opening bank accounts in South Dakota.
The Internal Revenue Service uses this unique nine-digit identification number to identify businesses throughout their lifetime.
If you own a South Dakota LLC, it is important to take action to obtain an EIN.
An LLC in South Dakota needs this for many reasons, including:
- Hiring employees
- Paying taxes and preparing tax returns
- Register your business with the Department of Commerce or the South Dakota Secretary of State office (if required).
This number will be used on all federal forms filed by the business.
That means that a single-member LLC should apply for an EIN if it wants to hire employees or is opening up a bank account, even though no taxes are due on its income.
Step 7: Obtain a Business License
South Dakota does not require a general business license for your LLC to operate. Depending on the nature of your business, you may have to obtain a specific license that applies to your company.
There is a fee associated with South Dakota LLC business licenses, which varies based on the size of your South Dakota company and the type of license you apply for.
Local licenses might also be required depending on the city or town in which your South Dakota LLC is located. Be sure to check with your local authorities for more information, or ask your registered agent.
South Dakota LLC Taxes
There are several factors to consider when deciding whether an LLC is how you want to conduct business.
One of the biggest considerations includes understanding how LLCs in South Dakota pay taxes.
By default, a single-member LLC is treated as a sole proprietorship. A multi-member LLC is treated as a partnership.
In South Dakota, an LLC with one member can choose to pay taxes either way: it can be taxed like a sole proprietorship or file its own separate tax return and be taxed like a corporation.
An LLC that has multiple members must always file its own tax return and elect to be taxed as a partnership.
There is no corporate income tax imposed on LLCs in South Dakota, which makes this state even more attractive for LLCs.
There is a franchise tax, but it only applies to LLCs that choose to be taxed as corporations rather than partnerships.
The amount of the annual fee will depend on how much total capital a business has invested in South Dakota and ranges from $25 – $200 per year.
Personal income tax in South Dakota is a flat rate of just two percent. This makes it one of the most tax-friendly states in the country for LLCs.
Sales tax is imposed on South Dakota LLCs registered to conduct business in the state and sell goods or services in states where they are not registered to conduct business.
The sales tax rate is four point five percent for most goods and services, but certain items like groceries, medicine, and health care have lower rates of taxation on them.
Keep in mind that city sales taxes might differ, so it is important to check the rates in the municipalities where your LLC does business.
What Are the Benefits of South Dakota LLCs?
The benefits of South Dakota LLCs include limited liability protection and pass-through taxation.
Essentially, limited liability protection means that the LLC owners are protected from personal liability for the company's debts and obligations.
South Dakota LLCs are pass-through entities, meaning that they do not pay taxes on business income.
Rather, the profits of the company are distributed to their owners, who report it as part of their personal tax returns.
Profits can be distributed in the form of dividends or salaries, which will then generate withholding and payroll taxes.
Another advantage of LLCs is that they can deduct their business expenses from their taxable income.
This includes things like office supplies, advertising costs, and travel expenses. As a result, the amount of tax you pay on your profits will be reduced.
Personal assets like your home, vehicles and personal bank accounts are not at risk if you own an LLC.
What Are the Downsides of South Dakota LLCs?
The downsides of South Dakota LLCs include lack of privacy and expensive filing costs.
The biggest downside to forming an LLC in South Dakota is the lack of anonymity.
Unlike other states, South Dakota does not allow for "bearer shares," which means that anyone who knows the name of the limited liability company can find out who its members are.
This could be a problem if you're looking to keep your business dealings private.
Another downside is that the state has some of the highest filing fees in the country. The state charges $150 to file your Articles of Organization, and you'll also need to pay a yearly fee of $50.
South Dakota LLC FAQs
Does South Dakota Allow Domestication of LLC?
South Dakota allows the domestication of LLC as long as the applicant files the Articles of Domestication with the South Dakota Secretary of State in order for this process to be completed.
How Do I File an LLC Annual Report in North Dakota?
To file an LLC annual report in North Dakota, submit the document online or through mail between January 15th and April 30th each year.
Online filing costs $50 while mail service is around $65.
Is There Franchise Tax for LLCs in South Dakota?
There is a franchise tax for LLCs in South Dakota if the business primarily sells goods or services.
Does South Dakota Have an Excise Tax?
South Dakota has an excise tax that is collected for specific products manufactured by a company, such as fuel, tobacco and alcohol.
What Is a Noncommercial Registered Agent in South Dakota?
A noncommercial registered agent in South Dakota is any individual or company that provides limited services and is confined to a few states. Noncommercial agents are not registered with the Secretary of State.
Starting an LLC in South Dakota
LLC formation in South Dakota can be accomplished if you follow the steps outlined above.
You can opt to hire professional help and seek legal advice from an experienced tax attorney or a company like ZenBusiness for guidance on what you need to know before forming your new company.
Once your LLC formation is successful, make sure to stay compliant with South Dakota state and federal laws governing businesses.
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References:
- https://sdsos.gov/docs/business/reservationofllcname20180215.pdf
