How to Start an LLC in South Dakota? (A Definitive Guide)
Starting an LLC in South Dakota can be a strategic move for entrepreneurs seeking to capitalize on the state's favorable business environment.
As an experienced business consultant, I have dedicated several hours to meticulously researching South Dakota's specific business regulations and requirements, and I will navigate you through each phase of the LLC formation process, from choosing a unique business name to obtaining necessary permits.
This guide aims to equip you with the essential insights and practical tips needed to launch and grow your business efficiently and effectively.
Quick Summary:
- To start an LLC in South Dakota, begin by choosing the type of LLC, then follow the specific steps set by the state and submit all required documents to legally establish your LLC.
- Members of an LLC in South Dakota have the flexibility to choose how their business entity is taxed.
- According to the U.S. Chamber of Commerce, South Dakota saw a 20.6% increase in new business applications from December 2022 to December 2023, indicating a growing interest in business formation within the state.
- In my opinion, the increasing trend of LLC formations in South Dakota reflects the state's appealing business environment and supportive legal framework for entrepreneurs.
How to Form 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.
1. Choose the Type of Your LLC (Mandatory)
When forming an LLC in South Dakota, you have a few types to consider, each with its own advantages and disadvantages:
- Single-Member LLC:
- Advantages: Complete control over decisions and operations; simpler tax filing; and less paperwork.
- Disadvantages: Limited growth potential and personal liability risk if the corporate veil is pierced.
- Multi-Member LLC:
- Advantages: Shared responsibility, potential for more resources and investment, and diverse skill sets.
- Disadvantages: Potential conflicts between members, a more complex management structure, and profit sharing.
- Series LLC (if available in South Dakota):
- Advantages: Separation of assets and liabilities within different series; streamlined operations for multiple ventures.
- Disadvantages: More complex structuring and legal uncertainties, as not all states recognize series LLCs.
In my consulting experience, I've advised numerous clients on forming their South Dakota LLCs. The choice between Single-Member and Multi-Member LLCs depends on the client's need for control versus collaboration. Series LLCs, though less common, offer flexibility for those managing multiple business lines.
2. Choose a Name for Your LLC (Mandatory)
As a business consultant, I emphasize to clients the importance of a distinctive and compliant LLC name. The name should not only meet South Dakota's legal requirements, like including 'LLC', but also embody the business's brand identity.
"In business, using your LLC's official name from the Articles of Organization isn't required for everyday operations. Instead, you may use a 'Doing Business As' (DBA) or fictitious name. In South Dakota, remember to register this DBA with the state's Secretary of State online."
- Delina Yasmeh, J.D./Tax LL.M, Distinguished Expert in Mergers & Acquisitions
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 the Federal, Bureau, or Treasury, should not be included.
The 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].
3. Select a Registered Agent (Mandatory)
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 with receiving any legal notices or documents. To illustrate, the registered agent is notified if your LLC fails 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 a 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.
4. File South Dakota Articles of Organization (Mandatory)
South Dakota LLC Articles of Organization are filed with the South Dakota Secretary of State.
Reflecting a robust entrepreneurial spirit, South Dakota saw a 20.6% increase in new business applications in December 2023 compared to December 2022, according to U.S. Chamber of Commerce data [2].
The South Dakota Articles must include:
- LLC name, address, and phone number;
- Purpose(s) for which they were 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 the 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.
Steps to Take After Forming an LLC in South Dakota
Starting a Limited Liability Company (LLC) in South Dakota is just the beginning. I will walk you through the essential steps you need to take after forming your LLC to ensure legal compliance and operational success.
Moreover, the dynamic nature of the market is evident as new and expanding South Dakota establishments contributed to a net job increase of 13,379, as per the U.S. Small Business Administration, showcasing the significant impact of small businesses on employment [3].
5. Create an LLC Operating Agreement (Optional, but Recommended)
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.
6. Apply for an Employer Identification Number (EIN) (Optional, but Recommended)
I routinely assist clients in obtaining an EIN for their LLCs. This number is not just a tax identifier; it's essential for hiring, banking, and establishing the LLC's credibility in the business community
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.
7. Open an LLC Bank Account (Optional, but Recommended)
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.
8. File your South Dakota LLC Annual Report (Mandatory)
For LLCs in South Dakota, filing an Annual Report is a mandatory requirement.
This report ensures that your business remains in good standing with the state. It typically includes updates on your LLC’s address, registered agent, and the current status of business activities.
The specific due date and filing fee can vary, so it's crucial to check these details annually with the South Dakota Secretary of State.
Keep in mind that filing requirements can change over time, so staying informed about the latest guidelines is essential.
Neglecting to file this report can lead to penalties or even the dissolution of your LLC, making it a critical step in your business's annual maintenance.
To file, you can visit the South Dakota Secretary of State's website, where you'll find the necessary forms and instructions for online submission.
9. Obtain Business Licenses and Permits
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.
10. Compliance with Employment Laws (Mandatory)
If your South Dakota LLC will have employees, adhering to state and federal employment laws is crucial. This involves several key areas:
- Unemployment Insurance: You are required to register with the South Dakota Department of Labor and Regulation for Unemployment Insurance. This insurance provides temporary assistance to employees who lose their jobs through no fault of their own. As an employer, you’ll need to contribute to this fund.
- Workers' Compensation Insurance: South Dakota mandates that most businesses with employees carry Workers' Compensation Insurance. This insurance covers medical costs and lost wages for employees who get injured or become ill due to their job. It's important to secure this insurance to protect your employees and comply with state law.
- Fair Labor Standards: You must comply with the Fair Labor Standards Act (FLSA), which sets standards for minimum wage, overtime pay, record-keeping, and youth employment. This federal law establishes the minimum wage and overtime pay eligibility.
- Equal Employment Opportunities: Under federal and state laws, including the South Dakota Human Relations Act, employers must provide equal employment opportunities. This means not discriminating based on race, color, religion, sex, national origin, disability, or age.
- New Hire Reporting: South Dakota requires employers to report new hires and rehired employees to the South Dakota New Hire Reporting Center. This helps the state enforce child support orders.
- Employee Postings: You are required to display certain notices in your workplace to inform employees of their rights under labor laws. These posters typically include information on the minimum wage, workplace safety, and non-discrimination policies.
- Payroll Taxes: As an employer, you must withhold the appropriate state and federal taxes from employees' wages. This includes Social Security, Medicare, and federal income tax, along with any applicable state taxes.
11. Choosing Your Tax Structure
Choosing your tax structure for an LLC in South Dakota involves weighing various options.
A single-member LLC is treated by default as a sole proprietorship, offering simplicity in filing personal tax returns. Alternatively, it can elect to be taxed as a corporation, which might benefit those seeking to reinvest profits in the business.
Multi-member LLCs are automatically treated as partnerships, necessitating separate tax returns. They can also elect corporate taxation, which is potentially advantageous for higher-earning businesses due to corporate tax rates.
South Dakota's lack of corporate income tax is a significant advantage for LLCs. However, those electing corporate taxation must pay a franchise tax based on the total capital invested in the state, ranging from $25 to $200 annually.
Personal income tax in South Dakota is attractively low, at a flat rate of 2%. This, combined with a moderate sales tax rate of 4.5% (with variations for specific items and municipalities), makes South Dakota a tax-friendly environment for LLCs.
Drawing from my experience as a business consultant, the default tax status often suffices for smaller LLCs due to its simplicity and cost-effectiveness. However, for larger LLCs or those planning significant reinvestments, corporate taxation might be more beneficial.
Changing your tax structure is possible by filing a form with the IRS, typically by March 15th for the current tax year. Regular reassessment of your business needs and consultation with a tax professional are advisable to stay aligned with your business goals.
Related Articles:
- How to Close an LLC in South Dakota
- LLC Processing Time in South Dakota
- How to Look Up an LLC in South Dakota
Benefits and Drawbacks of an LLC in South Dakota
Benefits:
- No State Income Tax: One of the most significant advantages of forming an LLC in South Dakota is the absence of state income tax. This can lead to considerable savings for business owners compared to states with higher tax rates.
- Low Franchise Tax: For LLCs that elect to be taxed as corporations, South Dakota imposes a relatively low franchise tax, which is based on the total capital invested in the state. This is beneficial for larger LLCs or those with significant capital investments.
- Asset Protection and Limited Liability: As with LLCs in other states, those in South Dakota offer personal liability protection. This means that the personal assets of the members are typically safe from business debts and lawsuits.
- Flexible Management Structure: LLCs in South Dakota enjoy flexibility in management. They can be managed by members or managers, allowing for adaptability to different business models.
- Simple Filing and Compliance Requirements: South Dakota offers a straightforward process for LLC formation and ongoing compliance, which can be less burdensome than in some other states.
Drawbacks:
- Limited Growth Potential: While LLCs offer significant protection and benefits for small to medium-sized businesses, they might not be the best structure for businesses looking to raise capital through public stock offerings.
- Self-Employment Tax: Members of an LLC are subject to self-employment taxes on their share of the profits. This can be higher than the taxes on wages if the LLC is profitable.
- Sales Tax Liability: If the LLC sells goods or services, it must collect and remit sales tax, which is 4.5% in South Dakota. This requires additional administrative work, especially if operating in multiple jurisdictions.
- High Filing Fees: South Dakota charges $150 to file your Articles of Organization, and you'll also need to pay a yearly fee of $50.
DIY vs. Professional LLC Formation
When forming an LLC in South Dakota, you can opt for a do-it-yourself (DIY) approach or seek professional services.
DIY LLC Formation
Pros:
- Cost-effective: DIY formation is generally less expensive since you're not paying for professional services.
- Control and Learning: You have complete control over the process and can gain valuable insights into the legal structure and requirements of your LLC.
Cons:
- Time-consuming: The process can be time-intensive, requiring you to research and understand state-specific regulations in South Dakota.
- Risk of Errors: Without legal expertise, there's a higher risk of making mistakes in paperwork or compliance, which can lead to future legal or financial issues.
- No Legal Guidance: You won't have professional legal advice to tailor the LLC to your specific business needs or navigate complex situations.
Professional LLC Formation Services
Pros:
- Expertise and Accuracy: Professionals bring expertise, ensuring accuracy in filing and adherence to South Dakota's specific regulations.
- Time-saving: Delegating this task saves you time, allowing you to focus on other aspects of your business.
- Additional Services: Many professional services offer ongoing compliance assistance, which can be invaluable for maintaining good standing.
Cons:
- Higher Cost: Professional services come at a cost, which might be significant for a start-up or small business.
- Less Hands-on Involvement: You might feel less involved in the process, which could affect your understanding of your LLC's legal framework.
FAQs
Does South Dakota Allow Domestication of LLC?
South Dakota allows the domestication of LLCs 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.
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.
References:
- https://sdsos.gov/docs/business/reservationofllcname20180215.pdf
- https://www.uschamber.com/small-business/new-business-applications-a-state-by-state-view?state=sd
- https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-SD.pdf
