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.
What is a South Dakota LLC?
An LLC is a limited liability company. This business structure provides personal liability protection for its owners or members. Members of the LLC are not personally liable for the debts and obligations of the LLC.
Tax benefits this business structure offers include pass-through taxation and the ability to deduct business expenses.
The LLC is a popular choice for businesses because it is easy to set up, maintain, and operate.
Limited liability companies in South Dakota offer flexibility when it comes to taxation election, so they can be taxed as sole proprietorships (default for single-member LLCs), partnerships (default for multi-member LLCs), or corporations (S or C corporation).
What Are the Benefits of South Dakota Llcs?
One of the main benefits of an LLC is that its members are protected from personal liability for the company's debts and obligations.
This means that if the business goes bankrupt, the members are not responsible for paying any of its debts.
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. Creditors may take only the assets of the business itself in order to pay off debts or claims against it.
LLC owners (also called members) of a limited liability company do not have personal responsibility for their liabilities and enjoy full personal liability protection; only their shares in the capital of the company are subject to claims.
What Are the Downsides of South Dakota LLCs?
Before starting an LLC in South Dakota, there are some potential downsides to consider.
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.
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. 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. South Dakota business law requires that the name chosen for your LLC must be unique and cannot be used by any other business entity registered in the state.
You can search for available names through the South Dakota Secretary of State website.
The LLC name cannot contain language stating it is a limited partnership, nor may the abbreviation "LP" be used. On the other hand, it has to contain abbreviations like "LLC" or "LC."
The name must be accompanied by the words "Limited Company," which can appear either in smaller case letters or separately as a suffix.
The LLC cannot be named using language that implies it is an entity other than a limited liability company such as a corporation, association, etc.
Restricted words you can't use in an LLC name include Bank, Trust, Insurance, Credit Union, and other such words. Words that can be linked with a government agency (IRS, Department of State, etc.) are strictly prohibited.
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 and can be extended if you have plans to use your desired LLC name but are not registered yet with the South Dakota Secretary of State Office.
Step 2: Hire a South Dakota Registered Agent
Registered agent services in South Dakota are important for two reasons.
First, they act as a point of contact for the state and any legal notices or documents that need to be sent to your company.
Secondly, a registered agent in South Dakota is required by South Dakota law to maintain physical office space in the state.
This is necessary to keep up with any changes or updates to South Dakota laws, file annual reports, and have a physical presence in case of any legal proceedings.
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 organizer that are member or manager/director (if member-managed);
- Initial registered agent designated by the LLC to receive service of process against it in South Dakota.
- provision about the LLC structure (member-managed or manager-managed)
The Articles of Organization are filed with the South Dakota Secretary of State through its online portal, Corporation System Online (CSOL). The filing fee for new LLCs is $150. Paper filings are $165.
After you file South Dakota Articles of Organization are filed, 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.
Step 4: Draft Your LLC Operating Agreement
The LLC is also required to have an LLC operating agreement that 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.
Most importantly, the operating agreements spell out how profits and losses will be allocated among LLC members, how business assets will be distributed if a member leaves or passes away, and 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
A South Dakota LLC business license is required to open up a South Dakota company bank account. Without the business license, you won't be able to receive payments for services rendered or products sold by your South Dakota LLC.
The South Dakota Department requires business licenses of Labor & Regulation. There is no specific license for LLCs, so you will need to apply for a general business license.
The application process is straightforward and can be done online. You will need to provide your South Dakota company name contact information and describe the products or services you plan to offer.
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.
South Dakota LLC FAQs
Does South Dakota Allow Domestication of LLC?
Yes, South Dakota allows the domestication of LLC. The process is quite simple and takes only a few minutes. A foreign LLC applicant needs to file the Articles of Domestication with the South Dakota Secretary of State in order for this process to be completed.
This form can be found on their website, which you need to fill out and submit along with a filing fee. Once the Articles of Domestication are filed, your LLC will be domesticated in South Dakota and will be treated as a domestic entity. This process is also known as registering an out-of-state South Dakota LLC.
How Long Does It Take To Set Up an LLC in South Dakota?
Online filings are processed on the same day of the application, so long as it is completed by the end of the business day.
If you need to have a hard copy, then processing time will take about two weeks. There is an expedite fee of $50 if you need it processed sooner. Mail filings may take up to a few weeks, so be sure to coordinate with your registered agent.
How Much Does It Cost to Start an LLC in South Dakota?
Filing LLC Articles of Organization in South Dakota costs $100. There is also a $25 annual filing fee for LLCs in South Dakota.
There might be some additional costs depending on how you choose to file and whether you opt for expedited filing.
Business licenses and permits will also likely be required, which will vary depending on the nature of your business. You can find more information on the South Dakota Secretary of State's website or ask a registered agent.
How Do I File an Annual Report in North Dakota?
Yes, every LLC registered in South Dakota is required to file an annual report between January 15th and April 30th each year.
he fee for filing your yearly report online with the Secretary of State's Office is $50, or if you choose to mail it, the cost to do so will be around $65.
If your company does not submit a South Dakota annual report by the designated date, you will be charged an additional $50 penalty by the Secretary of State's Office. It is extremely important to make sure your business files an annual report on time every year with these costs in mind.
If you don't submit the annual report even after being penalized, your company may be administratively dissolved. Get a registered agent to help with your LLC.
Does South Dakota Have State Business Income Tax?
No, South Dakota does not impose a state business income tax. This makes it a popular destination for businesses looking to set up shop in a state with low taxes. However, businesses should be aware that South Dakota does have a gross receipts tax.
This is a tax on the total amount of revenue your business generates, regardless of whether that revenue is from sales or services. There are several other taxes that businesses may be subject to in South Dakota, so it's important to do your research before setting up with your registered agent.
Does South Dakota Have Business Personal Property Tax?
No. There is no business inventory tax, personal property tax, or federal income tax in South Dakota. This makes it a popular state for businesses to incorporate.
Is There Franchise Tax in South Dakota?
Yes and no. Not every LLC is subject to franchise tax in South Dakota. However, the bank franchise tax is imposed on those companies whose income is derived primarily from the sale of goods or services.
It's also imposed on companies that have an interest in a bank, even if they don't own more than five percent of its stock.
The franchise tax rate for banks and other financial institutions is set at one-half percent (.005) of net worth per month, subject to certain limitations.
Does South Dakota Have an Excise Tax?
Yes, gross receipts taxes are collected on a wide range of transactions, including the sale or other transfer of real property, businesses transferring tangible goods from one business to another, services performed by employees for wages and commissions or rents from land, buildings, parking lots or storage spaces, as well as royalties.
What Is a Noncommercial Registered Agent in South Dakota?
A noncommercial registered agent in South Dakota is an entity that is authorized to receive service of process on behalf of a business.
The registered agent must be located in South Dakota and can be either a person or a company. Unlike a commercial registered agent who usually handles multiple clients, a noncommercial registered agent only handles one client.
Some examples of a South Dakota noncommercial registered agent are individuals such as the LLC owner or corporate directors and officers, lawyers, accountants, and commercial registered agents themselves.
LLC formation in South Dakota can seem confusing to a business owner. This is why it's essential 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.
Hiring an expert will save you time, money, and stress as they'll take care of all the paperwork that comes with establishing a limited liability company.
Once your LLC formation is successful, make sure to stay compliant with South Dakota state and federal laws governing businesses.
This will help to ensure a smooth-running operation for your company now and in the future.